To identify novel protein phosphatase 1 (PP1)-interacting proteins, a yeast two-hybrid 3T3-L1 adipocyte cDNA library was screened with the catalytic subunit of PP1 as bait. In the present work, the isolation, identification and initial biochemical characterization of a novel PP1-interacting protein, MYPT3, which is homologous with the myosin phosphatase targetting subunit (MYPT) family, is described. MYPT3 aligns > 99% with a region of mouse genomic DNA clone RP23-156P23 and localizes to chromosome 15, between markers at 44.1–46.5cM, as demonstrated by radiation hybrid mapping. The gene consists of ten exons that encode for a 524-amino acid sequence with a predicted molecular mass of 57529Da. The N-terminal region of MYPT3 consists of a consensus PP1-binding site and multiple ankyrin repeats. MYPT3 is distinguished from related ∼ 110–130kDa MYPT subunits by its molecular mass of 58kDa, and a unique C-terminal region that contains several potential signalling motifs and a CaaX prenylation site. We have shown that affinity-purified glutathione S-transferase (GST)–MYPT3 is prenylated by purified recombinant farnesyltransferase in vitro. Endogenous PP1 from 3T3-L1 lysates specifically interacts with MYPT3. Additionally, purified PP1 activity was inhibited by GST–MYPT3 toward phosphorylase a, myosin light chain and myosin substrate in vitro. Overall, our findings identify a novel prenylatable subunit of PP1 that defines a new subfamily of MYPT.